The filing status of “married filing separately” works differently in Iowa than it does on federal returns. But one thing that’s got me confused: how tax software handles Iowa itemized deductions when a couple files separate federal returns.

Lost yet? (Welcome to Iowa taxes!)

Background

Iowa has just one tax bracket, regardless of filing status, and the rates are highly progressive. So for most married couples where both spouses have income, it’s better to file separately on the Iowa return.

Iowa offers two options for filing separate returns: “married filing separately on a combined return” and “married filing separately on separate returns.” Both methods are supposed to arrive at the same end result. The difference is, on a combined return, everything for both spouses is calculated on one form and then combined at the end. Both spouses are jointly liable for the contents of the return. On completely separate returns, the calculations are the same but each spouse is responsible only for the contents of his or her own return.

Itemized Deductions

In Iowa, couples filing separately must allocate itemized deductions based on income. The instructions to the Iowa 1040 and Iowa Schedule A are quite clear that EITHER of the separate filing statuses MUST allocate deductions.

So if one spouse makes 60% of the income, that spouse gets 60% of the deductions. This is true even if one spouse made itemized deduction payments out of their own, completely separate funds. This is different from the federal rules for itemized deductions.

My Question

So here’s my question. I recently encountered one of those rare situations where a married couple would benefit by filing separately at the federal level and splitting the itemized deductions 50/50.

The problem is, my software defaulted to also creating completely separate Iowa returns and splitting the deductions 50/50 on the Iowa return.

This is wrong — isn’t it?

The itemized deductions should be allocated based on income — even on completely separate returns and regardless of how the deductions were allocated on the federal returns.

Right?

I sure hope so, because I forced my software (I use UltraTax) to do it right. In fact, I forced UltraTax to do a combined return rather than completely separate returns.

I ask about this because I have also noticed this on returns that new clients have brought me that they prepared in TurboTax the year before. Usually it’s couples in same-sex marriages: TurboTax will create the same-sex couple’s pro-forma federal return as married filing separately, and then create the Iowa return with the itemized deductions allocated in the exact same manner as the federal return (usually 50/50) as opposed to the allocation based on income that Iowa requires.

Have I found a universal software glitch or am I wrong about how Iowa itemized deductions work?

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